Australia: The Danger Lurking Between Exchange And Completion

The recent decision in Black v Garnock [2007] HCA 31 demonstrates the important practical issues for purchasers in safeguarding their purchase between the period from exchange of contracts and settlement.

The Black v Garnock case changes standard conveyancing practice in settlements, by making it necessary for legal practitioners acting for purchasers to lodge a caveat on title immediately following exchange of contracts and also to carry out a final search of the subject property as close to settlement (if not, on settlement) as possible. The case may even go so far as to suggest that it be 'salutary practice' to conduct settlement at the Department of Lands so that a final search can be carried out there immediately prior to settlement.

Background

On 15 July 2005, contracts were exchanged for the sale of a rural property for $1 million. The purchasers paid a 10% deposit, with the balance of the purchase price to be provided by its mortgagee. Settlement was the standard six week period.

The vendor owed approximately $228,000 to a firm of accountants. The creditors had been chasing payment of this outstanding debt. It was decided that the monies owed would be paid out of the settlement proceeds from the sale of the property. However, the day before scheduled settlement, 23 August 2005, the firm of accountants obtained a writ for the levy of the property against the vendor in order to settle the outstanding debt.

On the morning of settlement, 24 August 2005, the purchasers' solicitor had conducted a final search of the property. The search disclosed no further encumbrances beyond those already known to the purchasers, in particular, no writ. The firm of accountants contacted the purchasers' solicitor stating their interest in the property and advising that settlement should not proceed. Accordingly, settlement was postponed until the afternoon. In the meantime, the accountant's solicitor registered the writ over the property at the Department of Lands but did not notify the purchasers of registration. No updated search was ordered by the purchasers' solicitor and settlement occurred, with the balance of the purchase price being paid to the vendor.

The transfer was rejected for registration at the Department of Lands as a result of the existence of the prior writ now on the title. An attempt on behalf of the purchasers to lodge a caveat also failed. Accordingly, the purchasers had paid the full purchase price to the vendor but could not register the legal transfer of the property to them. The vendor had not used any of the proceeds of sale to repay the accountants so the writ could be released.

The Case

The purchasers commenced proceedings seeking an injunction preventing execution of the writ amongst other things on 28 September 2005. On 7 October 2006, the purchasers obtained an interlocutory injunction, however on final hearing the proceedings were dismissed as it was held that the purchasers did not have legal title, as they were not registered on title. The purchasers were then granted an interlocutory injunction by the Court of Appeal, which declared that as holders of equitable interests in land, the purchasers were entitled to priority over any rights to the land that might be held by the judgment creditors and restrained execution of the writ.

On appeal to the High Court, the majority of the High Court upheld the vendor's appeal. The Real Property Act 1900 (NSW), in particular the provisions relating to the recording of writs, was analysed and it was held in the majority that the Torrens land system, being a system of title by registration, meant that registration of a transfer under a writ vests in the transferee a particular kind of title by registration. The purchasers' attempt to rely on their equitable interests to claim priority over any rights to the property was not accepted, as the writ was registered first on the title.

Issues And Practical Implications

In light of the decision of the High Court, it appears purchasers and legal practitioners acting for purchasers would be advised to lodge a caveat immediately following exchange of contracts which would include exchange of contracts on exercising an option. This will assist in protecting the purchaser's interest between exchange and completion, even for contracts with a standard six week settlement period. Failure to do so potentially exposes the purchaser to risks such as that presented in the Black v Garnock case.

The Real Property Act 1900 (NSW) permits various dealings, including writs, to be registered even if a caveat is on title unless the caveat is specifically worded to exclude those particular dealings. So it is vital that the wording of the caveat is precise and specifically excludes those dealings from registration that the purchaser would not want registered on title prior to settlement.  The caveat should also be drafted so that it does not need to be withdrawn prior to settlement, in order to save costs and time for the purchaser. This will involve educating banks as to the appropriate wording on caveats so that they will not require the caveat to be withdrawn as a settlement requirement for lending.

Final searches of the property being purchased need to be conducted by the legal practitioner as close to settlement as possible. Callinan J in the Black v Garnock case suggested that settlements should occur at the Department of Lands for extra caution. However, the practicalities of doing so (for example, no settlement rooms) do not appear to support such practice. Accordingly, the transfer and related documents should be lodged as soon as possible immediately following settlement.

Conclusion

The Black v Garnock case has and will continue to alter conveyancing practice in NSW unless it is subsequently overturned. As a result,  education of purchasers, legal practitioners and banks on the new style caveats is required. The changes will also result in more costs for the purchaser where the cost of buying property is already very high.

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